Gold ETFs Net €3bn Safe Haven Inflows in 3 Months

The European exchange-traded-fund market netted in close to €8 billion of new money in the second quarter of 2016. This represented a decline from the €11 billion of net inflows registered in the first quarter.

Assets under management at the end of the second quarter amounted to €482.4 billion; a 4.2% increase from €462.9 billion at the end of the previous period.

Given the general investment environment in the second quarter, we see these figures in a positive light. Investors have had a tough time in the second quarter of 2016. Most prominently, the uncertainty about the potential result – and implications – of the UK’s referendum on EU membership warranted a cautious approach to investing.

The two most-commonly adopted strategies were either to sit tight and wait to see the actual outcome of this key risk event, or to seek shelter in presumed safe-havens. The two asset classes garnering the bulk of investors’ interest over the second quarter were fixed income, with €6.75 billion of net new money, and commodities – mostly gold – with €3.3 billion of net inflows.

This is the best half-yearly outcome on record for European ETPs providing exposure to the asset class, even surpassing the figures seen during the rush to gold at the height of the eurozone debt crisis back in 2012. It must be noted that although within this segment of the European ETP market we find all sorts of commodity exposures, investors have tended to cluster around products offering exposure to gold. And indeed, as was the case in the first quarter, the bulk of net new money invested in the second was largely directed to the yellow metal.

Meanwhile, investment in equity ETFs remained on the back foot for the second quarter running, with a total of € 2.7 billion withdrawn over the period. However, the bulk of these redemptions took place in April and May, whereas June bucked the trend, with net inflows of €1.2 billion, which some have quickly highlighted as a potential turn of the negative trend for the asset class.

Strategic beta – commonly known as smart beta – ETFs attracted €2.16 billion of net inflows in the second quarter. This represented 27% of the grand total for the European ETF market. The general risk-off environment during the second quarter – in fact throughout the first half of the year – favoured investment in risk-oriented strategic beta ETFs.

In terms of providers, iShares was again top money-gatherer with €5.25 billion of net inflows. By contrast, db X-trackers and Lyxor have not had a good year so far, and have lost market share to competitors.

Brexit Threat Causes Equity Fund Outflows

Investors pulled out €2.7 billion from equity ETFs in the second quarter of 2016. Equity markets had welcomed the second quarter in negative terrain, and the mix of uncertainty leading to the UK referendum – and the immediate aftermath of the Brexit vote – didn’t help their cause.

However, there was a rebound in the dying days of June, and investors flocked back to the asset class. Whether this heralds the start of a positive trend for the equity ETF investing in the coming months is open for debate. However, it seems fair to note that equity investors have taken heart from the fact that the Brexit vote has not triggered the “Lehman-like” sudden debacle many had foretold. In addition, the upturn in oil prices in the second quarter probably helped prop up sentiment about the shape of the global economy.

Overall, investors found Eurozone-wide and Japanese equities – both unhedged and hedged for foreign exchange exposure – to be at the low-end of their preferences. In the case of Eurozone equities, the mix of uncertainty and fears about the knock-on effects of the potential – later confirmed – departure of the UK from the EU are likely to have played a key role.

In addition, although somewhat buried under the cascade of Brexit news, investors also kept a wary eye on the beleaguered Italian banking system. On this point it must be noted that European financial sector equity ETFs had a very good run in June, pulling in close to €500 million in net new flows – the highest monthly outturn for well over five years to partly offset the €1 billion in outflows seen over the previous eight months. Investors reacted positively to news that the Italian government is working on a bailout plan for the sector. However, the situation remains very fluid.

Global emerging markets continued to show signs of a turnaround, with €2.12 billion of net new money flowing into the asset class. US large-cap equity was also in favour, with €1.93 billion netted in by currency unhedged ETFs and €630 million by hedged peers.

Source Morningstar. Jose Garcia-Zarate | 13/07/2016

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